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Harnessing Black Financial Power through a National Venture Capital Fund


By Michael J. Isimbabi, Ph.D.



January 1999

This brief examines key issues that constitute the core of a business plan for the establishment of a National Venture Capital Fund. Any assistance from the reader -- critiques, suggestions, advice, referrals to individuals or organizations with an interest in the concept discussed in this brief, etc. -- will be greatly appreciated. Kindly distribute copies of this brief to others.

This brief is an expanded and updated version of an article that was previously published in the online magazine, The Black World Today [], in January 1998.





II.1. Black Investment Power, Social Responsibility, and Prospective Investors

II.2. Black Entrepreneurship and the Prospects of Black Businesses

II.3. Inner-City Business Environments and the Prospects of Inner-City Businesses

II.4. Prospects



I. Introduction: The Capital Problem

Though black business growth has been impressive in recent years, limited access to capital continues to stunt black entrepreneurship and business development.1 Over the last three decades, attempts to alleviate the capital access problem faced by minority entrepreneurs have included government initiatives such as the Community Reinvestment Act (CRA), the Specialized Small Business Investment Companies (SSBICs) program, the Community Development Financial Institutions (CDFI) Fund, and the Empowerment/Enterprise Zone program. More recently, in 1998, the Small Business Administration (SBA) announced new initiatives through which, working with some African American organizations, it will seek to increase lending and development assistance to black-owned businesses. While some of these initiatives have been beneficial, their overall impact has, in general, been constrained by the usual limitations of government programs--bureaucracy, over-regulation, politicization, special interest considerations, limited innovation, etc. And, of course, current political trends indicate that even those initiatives that have had some measure of success will continue to be limited in scale and scope.

In the private sector, there has been a substantial increase in recent years in the sources of credit available to small businesses, e.g.: (i) several developments and innovations in the financial services industry have resulted in increased competition among banks and nonbank financial intermediaries for good lending opportunities; (ii) either voluntarily due to a recognition of profitable opportunities or as a result of initiatives such as the CRA, major banks and other financial services firms have set up programs that target community or urban development and minority businesses; and (iii) numerous community development financial institutions and microenterprise programs have been established in recent years.2 Also, the amount and sources of venture capital available to small businesses have increased in recent years. However, black entrepreneurs and businesses still find it relatively more difficult to obtain capital in part because of their relatively low financial networth, their limited networks, and financial intermediaries’ exaggerated perceptions of the risk associated with black-owned businesses.3 This problem is particularly severe with respect to venture capital, which, ordinarily, small businesses generally find difficult to obtain. Of course, lack of capital (a) inhibits the potential of prospective entrepreneurs who otherwise have the talent, motivation, skills, and experience to venture out and start businesses, and (b) hampers the growth of young businesses and may cause failure.

A basic question with regard to alleviating the capital problem is whether (and how) blacks themselves can pool funds to provide venture capital to deserving entrepreneurs. The logic in this regard is obvious: If indeed capital providers choose to ignore black entrepreneurs and business opportunities that otherwise can provide competitive risk-adjusted returns, why shouldn’t blacks take advantage of the opportunities and make the profits themselves, instead of imploring or coercing, and waiting for, others to do so? If black venture capital funds could pool substantial amounts of capital from a broad base of black individual and institutional investors, they could earn decent returns by providing the financing that black businesses otherwise find difficult to obtain, while at the same time also contributing to black economic progress. In particular, faster growth in black business formation will help to improve the economic prospects of the so-called black underclass: (i) the average black-owned firm employs a predominantly black workforce and is more likely to provide its employees with job training and other professional development assistance, and (ii) black-owned firms tend to be located in urban areas and therefore are more easily accessible to inner-city residents. Over the long-term, greater business success will enhance the entrepreneurial culture in black families and communities--even failed ventures can provide the type of experience that can strengthen the entrepreneurial spirit and capacity. With growth over the long-term (10-20 years), the funds could become crucial vehicles for private sector-based, self-reliant, and cooperative economic development. Ultimately, black economic prosperity through self-financed business development will reduce the need for dependence on government programs, as well as lead to a reduction in racial prejudice and the negative perception of blacks.

There are, of course, venture capital funds that are black-owned and/or target minority-owned businesses.4 However, these funds raise capital largely from institutional investors -- with much difficulty -- and collectively do not have a lot of capital at their disposal.5 There currently is no large national for-profit venture capital fund that seeks to pool capital directly from a large number of black individual investors. Presumably, this is because would-be sponsors believe that such a fund is unlikely to be viable in light of the rather daunting challenge of pooling relatively small amounts from a large number of people generally believed to be poor. The obvious questions in this regard, which are in large part due to the unfortunate negative stereotypes and myths about blacks, are as follows:

1. Given the substantial operational costs that would be required to (i) market to, and pool capital from, a large number of small investors and (ii) identify, invest in, and provide management assistance to a large number of small businesses, would the fund be able to provide competitive returns to investors?

2. Given the pervasive negative perceptions about black entrepreneurs/businesses, will (and how can) prospective investors be convinced that the fund can provide competitive returns?

3. Even if prospective investors were convinced that the fund would provide adequate returns, venture capital investing is highly risky and returns may not be realized for a number of years; thus, would there be a sufficient number of ‘patient’ black investors that can provide a capital pool large enough to make the fund viable?

4. To what extent are blacks concerned about black economic development such that they would invest in the fund in large enough numbers (especially if, because the fund has an explicit economic development focus, expected returns are lower than those of other investments of comparable risk)?

This brief examines these questions in the context of the feasibility of a for-profit National Black Venture Capital Fund ("the Fund") that would pool capital largely from black individual and institutional investors. It argues that such a fund, which, in effect, will harness the substantial financial power of middle- and upper-income blacks for economic development, is feasible. A general outline of a long-term strategy that would make the Fund successful is also provided. While the Fund could simply be structured and run like any ‘conventional’ or ‘generic’ venture capital fund, the variant examined here is a prototype "socially-responsible" fund that has an explicit economic development focus, but which does not compromise its for-profit orientation. In other words, while the Fund would have a social responsibility component, it would not be structured or managed with a charity mind-set.

In general, the Fund would provide venture capital to black-owned start-up and growing firms that meet its investment standards without regard to location—this would primarily be on the basis that the employees of minority-owned firms typically tend to be predominantly minorities. However, by virtue of its economic development focus, the Fund would proactively seek out and finance potentially profitable businesses that meet the Fund’s minimum standards of expected financial returns, but which the typical venture capital fund would ordinarily not finance. These would include, for example: (i) black-owned small businesses that do not meet the size requirements of conventional funds; and (ii) businesses -- black-owned as well as nonblack-owned – that are located in inner-city and rural areas with large black communities. In the latter case, such businesses would have the potential to have a direct impact on poverty alleviation, e.g., by providing (i) employment and professional development opportunities for residents, and/or (ii) services in areas such as housing, health, education, job training, legal assistance, finance, retail, etc. that will help to improve the quality of life of the residents.

The success of this Fund would be one way of meeting National Urban League President Hugh Price’s exhortation that:

"We must husband our individual and collective resources and invest them wisely in order to acquire the wealth—net financial assets—which will enable us to lessen our dependence on income—that weekly paycheck. In that way we will be able to more powerfully direct our philanthropy to support such black institutions as our local churches and Historically Black Colleges and Universities and those of the larger society. We must increase our ownership of businesses, small, medium-sized and large; build up local business districts in black neighborhoods, in the suburbs as well as inner-cities, so that we can provide jobs for residents of those areas and truly possess the land on which we live…"6

The Fund would differ from a typical venture fund in two ways: (i) while it may initially rely on institutional investors and high-networth individuals to jump-start it, it would ultimately be financed primarily by a large population of mostly middle-class individual investors who, in addition to financial returns, also seek social returns in terms of having a direct impact on black economic development; (ii) the Fund would deliberately have a national scope and would be highly diversified across industry sectors; and (iii) because of its explicit economic development objective, some of the businesses it will finance will be smaller than those usually financed by the typical venture capital fund.

Of course, establishing the Fund would be an ambitious project. To date, the most extensive initiative designed to provide venture capital to black businesses has been the Specialized Small Business Investment Companies (SSBICs) program. SSBICs are privately-owned firms licensed, regulated, and partly funded by the SBA that provide venture capital to minority-owned firms. The SSBIC program has, however, had limited success. In a 1995 study, Wayne State University professor Timothy Bates found that many SSBICs failed because (i) they were not large enough to achieve both portfolio diversification and operating efficiencies; (ii) their managements lacked the skills and experience required to compete in the venture capital industry; and (iii) they were poorly designed and administered by the SBA.7 The most successful SSBICs were the larger ones (with assets of $10 million or more) – these were professionally managed and well-capitalized, operated on a sufficiently large scale to diversify their risks and minimize operating costs, and were able to achieve growth and profitability through investments in relatively large and growth-oriented minority businesses.

The lessons and best practices that the successes and failures of the SSBICs provide would of course be instructive in determining the appropriate structure and management of the Fund. Prof. Bates’ findings, for example, underscore the need for the Fund to operate on a large scale and with sufficient diversification.

The large size, national scope, and sectoral diversification of the Fund, as well as the large number of small businesses in its portfolio, will provide significant risk diversification for investors. However, the explicit economic development focus – in particular, financing businesses in high poverty areas which, while profitable, may not necessarily provide the highest possible returns – could make the Fund’s overall returns slightly lower than they would be otherwise. Also, the need for the Fund to market to a large number of investors and help manage a large number of small firms may entail relatively higher per-unit operational costs than those of a typical fund. (This necessitates the use of innovative strategies, such as new information technologies, to minimize operating costs and ensure scale economies.) Thus, compared to conventional venture capital funds which require higher returns to compensate for the higher risks of their investments, the Fund’s expected return would be low, i.e., commensurate with the lower, more diversified risk of its portfolio. However, the average time before investors realize returns is likely to be shorter than that for a typical venture capital fund.

Obviously, the Fund would be most attractive to investors who, besides having surplus funds to invest, have a strong sense of social responsibility with regard to black progress, and do not expect immediate returns on their investments. Presumably, these investors would be willing to invest in the Fund even if the expected financial return is slightly lower than what they would get on investments of similar risk, i.e., they would forgo a fraction of financial return in exchange for social return. Thus, the success of the Fund will essentially be predicated on the existence of a large enough number of such socially-conscious investors.

In the next section, the feasibility of the proposed Fund is examined in light of recent developments and trends with respect to: (i) the growing black middle- and upper-class and its substantial investment power; (ii) intensified efforts in the black community to utilize private sector-based approaches to foster economic and social progress; (iii) the strong sense of social responsibility in the black community; (iv) the emerging new breed of black entrepreneurs; and (iv) business opportunities in inner-cities and efforts to make inner-city environments more conducive to private investment. In Section III, a basic strategy for the establishment, structure, management, and marketing of the Fund is outlined.


II. The Feasibility of A National Venture Capital Fund

The viability of the Fund will depend on: (1) its ability to provide credible and convincing evidence that the businesses in which it will invest can provide financial and social returns that are high enough to attract prospective investors; and (2) the existence of a large enough number of such investors who have surplus capital to invest on a medium- to long-term basis. Feasibility must therefore be examined with respect to blacks’ savings/investment culture and financial power, black entrepreneurship, the prospects of black and inner-city businesses, and the inner-city business environment, issues about which negative perceptions, stereotypes, and myths still persist.

  1. Black Investment Power, Social Responsibility, and Prospective Investors

As often noted, there is a large and growing black middle- and upper-class with substantial spending power. The corollary of such spending power is of course investment power, which can be harnessed to foster economic development. As financial consultants Shelley Greene and Paul Pryde note:

"New economic activity tends to spring up where resources, especially money, are available to support it. The black not nearly so poor as its cultural mythology would have it believe. In terms of per capita income, American blacks are among the richest people on earth. Yet blacks know their savings—in the form of life insurance, pension plans, or bank deposits—finance office buildings in downtown New York, shopping centers in Orange County, and retirement homes in Florida. Little goes toward financing new economic activity undertaken by blacks in black neighborhoods....Blacks themselves may not invest in their own communities because black banks, insurance companies, and other financial institutions either cannot or will not pool risk and spread functions to reduce investor risk."8

According to the U.S. Census Bureau, more than six million blacks earn money incomes of $25,000 or more per year. The investment potential here is obvious: Assume that only one-third of this population is able to save, on average, $1,000 every year, i.e., about $83 each month.9 This amounts to a capital pool of $2 billion per year. Assume further that somehow a groundswell can be generated in the black community toward investing in black venture capital funds. Even if this results in the investment of only 20% of the $2 billion capital pool in black venture capital funds,10 it would provide $2 billion over a five-year period. (Less optimistically, even only 10% of the pool would provide $1 billion over five years.) This amount could, of course, be further leveraged to provide substantial additional financing for black businesses.

Obviously, pooling capital in this way would represent a major challenge to the initial sponsors/partners of the Fund. Attempts to generate a groundswell may initially achieve only modest results in terms of the amount of capital that would be pooled. However, there is the likelihood that, over a few years, demonstrated success in the use of the modest amount of capital pooled initially will clearly show the potential of harnessing black financial power in this way to significantly raise blacks’ economic and social status. This would then heighten interest and lead to substantial growth in the number and capital pool of black venture capital funds after a few years. (This underscores the need to maintain a long-term perspective with respect to the growth and economic impact of the Fund.) Recent trends in the black community with regard to (i) the savings/investment culture, (ii) the increased focus on entrepreneurship and business development as the key to progress, and (iii) social responsibility indicate that this potential is indeed there, as discussed next.

As African Americans have become more affluent and strive to build wealth to ensure financial security, they are saving and investing at higher rates, and interest in investment vehicles such as mutual funds and investment clubs is rising.11 Black Enterprise reported in 1997 that there were 16 black-owned mutual fund companies in the country compared to only one a decade earlier.12 According to a recent survey of high income black and white Americans13 by Ariel Capital Management (the first and largest black-owned investment management firm) and Charles Schwab, 67% of high income African Americans said they save or invest money aside from their retirement savings and investments; 57% were invested in the stock market; 50% said that they had accounts in brokerage or mutual fund companies; and those who were invested in stocks, bonds, and mutual funds said they had been investing for an average of 9.9 years.14

To be sure, blacks invest at lower rates and more conservatively than whites. The Ariel-Schwab study found that 81% of high income whites were invested in the stock market (compared to the 57% figure for blacks) and 71% of whites had brokerage or mutual fund accounts (compared to 50% of blacks). In general, most blacks’ investment portfolios tend to be skewed toward safer investments such as real estate, savings accounts, and life insurance. In a recent New York Times Magazine article, Boston University professor Glenn Loury, founder and director of the Institute on Race and Social Division, outlined some of the reasons for this disparity:15

  1. Blacks are more risk-averse because, in most families, the current generation is the first to have surplus funds for investing.
  2. Due to racial exclusion and discrimination over several generations, blacks have historically been suspicious of financial markets and institutions--this is still reflected in the fact that even some younger and well-educated blacks still do not have much knowledge of or confidence in investment alternatives such as stocks and mutual funds; thus, blacks traditionally have had easier access to, and have been more familiar with, relatively safer, low-yield investments such as life insurance.
  3. Because black families historically have had limited accumulated wealth, many blacks have poorer relatives that they have to support, and therefore have little surplus capital for investment.

Also, economist Julianne Malveaux notes that, compared to the nonblack population, blacks tend to spend a higher proportion of their income because "the fact that social respect comes so hard for Blacks in America may have also made us too vulnerable to consumerist values."16

There clearly is a strong trend toward a more sophisticated culture of savings/investment and wealth accumulation in the black community. Education and information dissemination programs initiated in recent years by individuals and organizations (such as the Rev. Jesse Jackson’s Wall Street Project, the Coalition of Black Investors (COBI) (, Creative Investment Research (, Ariel Capital Management, Charles Schwab, the Chapman Company, etc.) will further boost this trend.17 According to the Ariel-Schwab study, "the desire to save or invest more is quite strong" among African Americans -- 73% of those surveyed said their lack of knowledge about investing is a reason why they do not save or invest more (38% said this is a "major" reason). Investment education seminars co-sponsored by COBI, Ariel, and Schwab in April 1998 reportedly met with strong demand and have prompted more of such seminars. Also, in recognition of a growing market segment, many financial firms are increasingly marketing to prospective black investors—advertisements by these firms in Black Enterprise, for example, reportedly increased significantly in 1998.18

The foregoing suggests that there is a sizable number of blacks who can and would invest a small fraction of their savings in the Fund as part of well-diversified portfolios, as long as they are convinced that the Fund has the potential to provide acceptable returns. To be sure, a majority of the black population does not have much surplus capital for investment, and the general presumption is that lower-income or so-called working-class people do not save. This would imply that only affluent people would invest in the funds. However, it is worthy of note that many lower-income people regularly contribute significant amounts to charities and activities to help their respective communities. Therefore, if they are convinced that the Fund is an effective vehicle for channeling their capital to foster black progress while at the same time providing them with decent returns, even those with modest incomes would be willing to invest small amounts in the Fund. [Again, this underscores the need for cost-efficient and effective education, information dissemination, marketing, and operational strategies by the Fund in order to attract small investors and make it easy for them to invest in the Fund.]

Indeed, given an acceptable level of financial return, it is the potential social return that would motivate many middle- and lower-income blacks (and some nonblacks) to invest in the Fund. The Ariel-Schwab survey, for example, found that blacks are twice as likely to favor socially responsible investments as whites—blacks’ concerns in this regard were about issues such as the diversity of a company’s management.

There has, of course, always been a strong sense of social responsibility in the black community. Middle-class blacks increasingly feel that they have an obligation to help foster black economic progress and help less advantaged blacks.19 For example, in the last few years, community involvement -- through financial contributions, volunteerism, etc. -- has reportedly increased significantly, especially since the Million Man March in October 1995. Some recent events and trends have further intensified such feelings. Most blacks of all classes are, of course, law-abiding, hardworking, tax-paying, and respectable citizens, but, regardless of how successful they are, continue to be negatively stereotyped. As Ellis Cose vividly documented in The Rage of a Privileged Class, blacks are deeply concerned about these negative perceptions and stereotypes, which remain a persistent cause of pain and rage. Also, some blacks see the current attacks on affirmative action, the black church burnings, the success of books by Charles Murray and Dinesh D’Souza (which reinforce stereotypes of genetically based intellectual inferiority and cultural dysfunction), etc. as indications of a renewed onslaught on them--as Black Enterprise publisher Earl Graves put it, a "siege on our hard-worn economic gains of the past quarter century."

These developments evidently have evoked a sense of urgency among African Americans to focus more on achieving progress through entrepreneurship and business development, cooperative economics, pooling of capital, wealth building, etc., rather than dependence on government programs – in this regard, several local and national initiatives have been started in recent years by individuals as well as civil rights, professional, business, and religious organizations.20 A recent Wall Street Journal report, for example, cited the case of an investment club, Community Financial Investment Groups, that was started in the wake of the destruction that followed the Rodney King verdict in 1992. According to the proprietor, the club takes equity positions in local, minority-owned businesses in Los Angeles and operates at the grassroots to attract African American investors "who say they don’t have any money to invest. We show them they do."21

Thus, such powerful sentiments are likely to motivate many blacks to see a fund that provides decent returns and also fosters black economic progress as a potent vehicle for the highest form of socially responsible investing for them.

2. Black Entrepreneurship and the Prospects of Black Businesses

As many have noted, contrary to general belief, entrepreneurship is not a new phenomenon in the black community. University of Texas professor John Sibley Butler notes that the current growth in black entrepreneurship "suggests a return to [a] tradition" that flourished after the end of slavery; however, over the years, Jim Crow and other special anti-black business laws, intimidation through violence and other means, etc. subsequently stunted the entrepreneurial spirit in the black community.22

In a 1993 study for the Joint Center for Political and Economic Studies, Professor Timothy Bates reported that: (i) an emerging group of black entrepreneurs has been entering lines of business where minority representation has historically been minimal; (ii) compared to ‘traditional’ black business-owners, these entrepreneurs were better educated and had more expertise and corporate experience; (iii) the emerging black firms were larger, had lower failure rates, and generated more jobs; and (iv) black businesses consistently hire black workers regardless of the firms’ locations.23 And according to American Demographics magazine, recent U.S. Census Bureau data show that "black-owned businesses are growing faster than average, but remain smaller than average …[and] population growth is only part of the reason for black business growth. The educational attainment of blacks has been increasing, making entrepreneurial endeavors more likely."24

These trends are of course evident from a perusal of issues of Black Enterprise over the last decade. There is a large and growing cadre of well-educated and skilled black entrepreneurs and managers with business experience who are well-equipped to exploit business opportunities and manage successful businesses, including, of course, those in high-skill and high-technology sectors.25 And most of these ‘emerging’ entrepreneurs tend to establish businesses in urban areas where they and much of the black population live. Green and Pryde also note that:

"More black Americans than ever before have the combination of talent, skills, opportunity, and motivation to go into business for themselves....A highly trained cadre of black professionals sits bottlenecked at midlevel administrative and management positions in white-owned companies. The pull factor of perceived opportunities together with the push factor of a shrinking public sector will undoubtedly propel more and more Americans, black and white, into entrepreneurial pursuits....Urban America holds many of the most promising opportunities for black entrepreneurs....Areas with large black populations, these [urban] regions have created new administrative centers that provide unprecedented opportunities for black urban firms."26

Obviously, if entrepreneurially-minded blacks with the requisite education, skills, and experience (who may otherwise be discouraged or hampered by low financial networth or limited access to capital) see that they can obtain venture capital from a Fund that has faith in them and will help them to succeed, they would be more motivated to embark on entrepreneurial ventures. With adequate capital and other forms of assistance, they will be well-positioned to compete and succeed in the marketplace. In the emerging global economy, the market opportunities extend beyond the U.S. to black African and Caribbean nations as well as other emerging economies. Thus, there is little doubt that the Fund will find several potentially profitable ventures in which to invest and thereby provide adequate returns to investors.

3. Inner-City Business Environments and the Prospects of Inner-City Businesses.

Inner cities are general perceived as poor environments for profitable private sector investment. However, as businesses such as supermarket chains, other retailers, banks, and other services firms have discovered in recent years, there exist profitable business opportunities in inner-cities that can provide competitive returns.27 Over the last decade, there have been several successful joint efforts by governments, the private sector, and community organizations to revitalize inner-city neighborhoods.28 The success of such initiatives to make inner cities more conducive to private investment will spur the establishment of businesses that can provide services in areas such as housing, health, finance, education and job training, legal assistance, etc. which inner-city residents direly need. Black Enterprise, for example, recently reported that business incubators that provide entrepreneurs with rental space, technical support, and access to capital are helping to revitalize some inner-city neighborhoods.29

However, inner city revitalization critically depends on government involvement -- in addition to initiatives that provide tax and other incentives to spur business development (e.g., the Enterprise/Empowerment Zone programs), government efforts must also address problems such as poor infrastructure, social welfare, crime, etc. if inner cities are to become more conducive environments for business. Unfortunately, government initiatives are, of course, often uncertain, unreliable, limited in scale and scope, and highly politicized. And current political trends indicate that even those approaches that have been shown to be effective are unlikely to be expanded significantly. As Wall Street Journal columnist Al Hunt has noted, the inner-cities are "politically incorrect."30 Thus, opportunities in inner-cities are likely to remain limited for quite some time. (Part of the Fund’s long-term development strategy would therefore include engagement in advocacy activities for public and private initiatives to improve the business environment in inner cities.)

Nevertheless, to the extent that some revitalization efforts succeed (as some have in recent years), there will be profitable business opportunities—after all, some businesses have continued to thrive in inner-cities despite the problems. Harvard University professor Michael Porter, founder of the Initiative for a Competitive Inner City (ICIC), argues that inner-cities "possess strong existing and potential competitive advantages… the competitive advantages, however, are often obscured by numerous disadvantages, such as poor infrastructure, difficulties in land assembly, a poorly trained workforce, environmental degradation, limited access to capital, and crime," which are compounded by negative perceptions about the nature of business opportunities, the workforce, and the threat of crime.31 The ICIC notes that while significant barriers exist, risk perceptions of inner city business environments are often exaggerated and many opportunities for business development are untapped. It has undertaken "benchmark" studies which identify the competitive advantages and strategies for growth of various inner cities in Baltimore, Boston, Chicago, Oakland, Washington, DC, Atlanta, Los Angeles, Newark, Miami, and Kansas City.

Porter has also noted that "there is a demonstrated capacity for entrepreneurship among inner-city residents, most of which has been channeled into microenterprises and the provision of social services." He also disputes the myth that "skilled minorities -- many of whom grew up in or near [inner cities] -- will inevitably work or create businesses in more affluent areas. Today’s large and growing pool of talented minority managers represents a new generation of potential inner-city entrepreneurs. Many of these managers have developed the skills, networks, capital, and confidence to join or start entrepreneurial companies in the inner-city. We know of some -- including former students of mine -- who are doing so. As the awareness of the economic opportunities in inner cities grows, more will follow."32

Clearly, a fund that can find untapped profitable opportunities in inner cities and finance entrepreneurs that are well-equipped to take advantage of such opportunities can become quite successful. The ICIC, for example, recently established the Inner-City Fund, which will invest in inner-city businesses "with strong, proven management teams and products or services with demonstrated market acceptance, rather than start-ups." The fund’s primary focus will be "to tap the huge, poorly served consumer market of the inner-cities by financing the expansion of inner-city-focused retail and service businesses," but it will also seek attractive opportunities in areas such as business services, logistics, manufacturing, and real estate.33

4. Prospects

The foregoing indicates that there is reason to believe that middle- and upper-income blacks will see the Fund as an appropriate vehicle for channeling their capital to help foster black progress. (Of course, the Fund should appeal to some nonblacks as well -- there is a significant population of nonblacks who see black economic development as an important component of national economic and social progress.) Furthermore, to the extent that the Fund is also seen as helping to revitalize inner-cities, it will appeal even more to those investors who consider the revitalization of inner-cities to be critical to the nation’s long-term economic growth and the reduction of racial and class tensions. Such socially conscious investors – black and nonblack -- would likely accept a lower risk-adjusted financial return than would be obtainable on comparable investments, provided the social return is significant.

While most prospective investors will find the concept of the Fund and its objectives appealing, the Fund may not attract large numbers of investors or large amounts of capital initially because of the risky nature and medium- to long-term return horizon of its venture capital investments. Therefore, the expectations for the initial years of the Fund would be modest, and it would be unrealistic to expect that the Fund would have a dramatic economic impact in the short-term. There arguably is a large enough number of prospective investors to make the Fund economically viable on a modest scale at the beginning; this number would grow as blacks become more affluent and ongoing efforts to strengthen the saving/investment culture -- in which the Fund should be fully engaged -- become successful. Therefore, the challenge for the Fund, which it should address as part of its marketing strategy, would be the following:

1. Convince prospective investors that investing in the Fund would be an option available to them -- in addition to retirement and pension plans, mutual funds, etc. -- as they build well-diversified medium- to long-term portfolios for greater financial security at retirement, their children’s education, etc.; thus, allocating a small fraction of their investments to the Fund would be a means by which they can achieve their investment objectives while at the same time also contributing to black progress.

2. Dispel the negative perceptions and myths about black businesses that some skeptical prospective investors may hold, and establish or reiterate the obvious: there are competent black entrepreneurs who can successfully start and run businesses and provide investors with competitive returns, but who are unable to pursue entrepreneurial endeavors due to limited access to capital.

3. To establish instant credibility (especially with skeptical would-be investors), the Fund should have a first-class team of sponsors/partners and management who have a strong commitment to fostering black progress, and whose ability to identify the best business opportunities, make sound investment decisions, and manage the Fund efficiently, would not be in doubt.


III. Strategy: Structure, Management, and Marketing

In light of the foregoing, the Fund should have a sufficiently long-term perspective and strategy, on the basis that growth will occur gradually as the savings/investment culture improves, the number of prospective investors increases, and the available pool of capital and business opportunities expand. Starting on a modest scale (perhaps even at a regional level initially), a well-managed fund should establish a good track record within five years in terms of the returns it can provide to investors and the positive impact it can have on black business development and economic progress. Such success will in turn be the best marketing tool for a fund, enabling it to attract more capital from a larger investor base.

The basic elements of a strategy that would ensure the success of the Fund are as follows:

1. The Fund would be started by a core group of highly-motivated, visionary, innovative, and entrepreneurial initial sponsors/partners who, despite the daunting challenge that the endeavor poses, are strongly convinced of its potential and would therefore be the driving force behind its success. The group could consist of about 10-20 individuals (entrepreneurs, venture capitalists, academics, investment professionals, bankers, consultants, lawyers, journalists, etc.), foundations, corporations, and other institutions. These individuals and organizations would contribute modest amounts to raise about $50,000 - $100,000 in initial capital.

2. The initial capital would be used to finance the Fund’s initial operations, primarily the preparation of a business plan and other marketing documents based on rigorous research and analysis. A technical assistance association would also be established with a major investment firm as a co-sponsor/partner/advisor. The business plan would provide credible and convincing evidence on the potential financial and social returns that prospective investors can expect from the Fund, i.e.:

The plan must also explicitly dispel the stereotypes and myths that underlie the skepticism that some prospective investors may have about the Fund’s prospects. In general, the lessons learned and the best practices that have evolved from the experiences, successes, and failures of past efforts with regard to minority and inner-city business financing such as the SSBICs, venture capital funds, CDFIs, etc., would be used to guide strategy formation.

3. To have the desired national scope and impact, the Fund must be large enough to ensure economies of scale and sufficient portfolio diversification. The Fund would be marketed initially to a well-targeted group of high-networth individuals and institutional investors who would in effect provide the initial financing to jump-start it. This group should include well-known individuals and organizations respected and admired for their high reputation and integrity (and preferably nationally known) who would help to market the Fund nationally. This would ensure that the Fund establishes instant credibility with prospective investors nation-wide when it is launched.

4. The initial seed capital raised (say $20 million or more) would then be used to (a) assemble a skilled, experienced, and highly competent management team and (b) identify and invest in business opportunities that meet the Fund’s investment criteria.

5. Thereafter, to attract a larger and more diverse investor base, i.e., largely middle-class individuals, the Fund would embark on a carefully crafted, cost-effective nation-wide marketing campaign. This would include setting up mechanisms, through networks in the black community (religious, business, professional, social, and community organizations), fund-raisers, direct mail, the Internet, the media, etc., to inform small investors and make it easy and convenient for them to invest in the Fund. The marketing strategy would also include effective education and information dissemination programs designed to attract and expand the pool of prospective investors--especially efforts to strengthen the savings/investment culture in the black community, e.g., by promoting the formation of more investment clubs, the automatic deduction of funds from paychecks or checking accounts for investment, etc. (As noted earlier, it will take a few years for the Fund to establish a record that will enable it to attract a large number of investors; thus, the marketing program must be undertaken with a long-term perspective, without unrealistic short-term expectations.)

6. As part of its long-term development strategy, the Fund would also have a nonprofit arm that will work to foster black entrepreneurship and business development. This would be done through research, education, information dissemination, and advocacy for public policies and private efforts to: (i) encourage entrepreneurship, wealth-building, education, job training, community revitalization efforts, etc. in black communities; (ii) make inner-cities more conducive to private enterprise; (iii) help to develop and promote innovative strategies to help the poor get out of poverty through self-reliance; (iv) enhance the savings/investment culture; and (v) reduce racial stereotyping and prejudice and change negative perceptions about blacks. These efforts would, of course, eventually foster the growth of the Fund by helping to create larger markets and business opportunities and increase the pool of prospective investors over time.



1. For contemporary as well as historical trends and perspectives on black entrepreneurship, see; Butler, John S., "Black Entrepreneurship, The Sequel," Inc., October 1996; Mergenhagen, P., "Black-Owned Businesses," American Demographics, June 1996; Butler, J.S., "Race, Entrepreneurship, and the Inner City," USA Today Magazine, January 1995; Bennett, L. and C. White, "Black and Green: The Untold Story of the African-American Entrepreneur, (Part 1)," Ebony, February 1996 (Excerpt from the book, The Shaping of Black America); Bates, Timothy, Banking on Black Enterprise: The Potential of Emerging Firms for Revitalizing Urban Economies (Washington, DC: Joint Center for Political and Economic Studies, 1993); Butler, J. S., Entrepreneurship and Self-Help Among Black Americans (State University of New York Press, 1991); Greene, S. and P. Pryde, Black Entrepreneurship in America (New Brunswick, NJ: Transaction Publishers, 1990); Oliver, M. L. and T. M. Shapiro, "Closing the Asset Gap," in The State of Black America 1998 (New York: National Urban League, 1998); Oliver, M. L. and T. M. Shapiro, Black Wealth/White Wealth: A New Perspective on Racial Inequality (New York: Routledge, 1995); Woodard, M. D., Black Entrepreneurs in America (New Brunswick, NJ: Rutgers University Press, 1997).

2. Board of Governors of the Federal Reserve System, Report to Congress on the Availability of Credit to Small Business, October 1997.

3. Tannenbaum, J. A., "Where the Money Isn’t," The Wall Street Journal, May 21, 1998; Mack, G., "The Soft Walk Yields the Big Bucks," Black Enterprise, June 1995; Mack, G., "Fueling the Growth of Black Companies," Black Enterprise, November 1994; Oliver, M. L. and T. M. Shapiro, Black Wealth/White Wealth: A New Perspective on Racial Inequality (New York: Routledge, 1995).

4. See, for example: Tannenbaum, 1998, op. cit.; Jones, J., "Creating a Little Synergy," Black Enterprise, May 1996; Brown, C. M., "Business Owners Dip Into Capital," Black Enterprise, April 1996; Kraus, J. R., " New York Banks Start Fund for Minority Ventures," American Banker, October 31, 1995; Mack, G., "The Soft Walk Yields the Big Bucks," Black Enterprise, June 1995.

5. Tannenbaum, 1998, op. cit.; Mack, 1995, 1994, op. cit.

6. Price, H., "Economic Power: The Next Civil Rights Frontier," National Urban League, 1997.

7. Bates, T., "The Minority Enterprise Small Business Investment Company Program," Urban Affairs Review, May 1997.

8. Greene and Pryde, 1990, op. cit.

9. The $1000 per year figure is only an average – an individual with an income of, say, $25,000 may save as little as $500 per year (less than $42 per month), i.e., 2% of income. Of course, persons in the higher income brackets would save much more than $1,000 per year.

10. The average investor would of course invest the remaining 80% in several other investments (including safer ones) in order to maintain a well-diversified portfolio.

11. Truell, P., "The Black Investor, Playing Catch-Up," The New York Times, August 23, 1998; Kinsella, E. and N. M. Christian, "Investment Clubs Catch On With Blacks; Climb in Income Prompts Change," The Wall Street Journal, October 15, 1997; Singletary, M., "Tapping an Untapped Investment Market," The Washington Post, June 30, 1997; Scott, M. S., "Don’t Let the Bull Market Pass You By," Black Enterprise, June 1998; Novich, D./Bloomberg, "Wall Street Looks to Tap Blacks’ Increasing Interest in Markets," (, November 3, 1998; "Blacks With Green Are Targets of Investment Houses," News-Journal Online (, September 21, 1998.

12. Anderson, J., "The Feeling Is Mutual," Black Enterprise, October 1997.

13. Households with annual incomes of more than $50,000.

14. "The Ariel/Schwab Black Investor Survey: Saving and Investing Among High Income Black and White Americans," MBN Global Internet Web Site (

15. Loury, G., "Why More Blacks Don’t Invest," New York Times Magazine, June 7, 1998; Truell, 1998, op. cit.

16. Malveaux, J., "Banking On Us: The State of Black Wealth," Essence, October 1998.

17. See, for example: Malveaux, op. cit.; Truell, 1998, op. cit.; Smith, E. L., "The Wall Street Project: What Does It Mean for You," Black Enterprise, October 1998; Egodigwe, L., "One for Your Money: The Quest to Leverage Capital," Black Enterprise, September 1998; Scott, 1998, op. cit.; Hirsch, J. S., "Chicago Bulls: How Jesse Brown Gets Reluctant Customers to Dive Into Stocks," The Wall Street Journal, September 17, 1997.

18. Novich, 1998, op. cit.; News-Journal Online, 1998, op. cit.

19. See, for example, Bennett, R.A., "Having Your Say" (Reader Survey), Black Enterprise, August 1995; Hayes, C., "Is the ‘Good Life’ Good Anymore?", Black Enterprise, August 1995.

20. See, for example: Price, op. cit.; Malveaux, op. cit.; Singletary, M., "Keep the Faith - and Your Consumer Caution," The Washington Post, September 21, 1997; Woodard, 1997, op. cit.; Oliver and Shapiro, 1995, op. cit.; Brown, T., Black Lies, White Lies (New York: William Morrow, 1995); Fraser, G., Success Runs In Our Race (New York: William Morrow & Co., 1994); Brown, C. M., "The Business Factory," Black Enterprise, October 1998; Muhammad, T.K., "From Buppie to Biz-wiz," Black Enterprise, January 1997; DePriest T. and J. Jones, "Economic Deliverance Through the Church," Black Enterprise, February 1997.

21. Kinsella and Christian, 1997, op. cit.

22. Butler, J. S., "Black Entrepreneurship, The Sequel," Inc., October 1996; Butler, J.S., "Race, Entrepreneurship, and the Inner City," USA Today Magazine, January 1995; Bennett, L. and C. White, "Black and Green: The Untold Story of the African-American Entrepreneur, (Part 1)," Ebony, February 1996 (Excerpt from the book, The Shaping of Black America).

23. Bates, 1993, op. Cit

24. Mergenhagen, 1996, op. cit.

25. See also: Fortune, Report on "The New Black Power," August 4, 1997; Woodard, 1997, op. cit.; Mergenhagen, 1996, op. cit.

26. Greene and Pryde, op. cit.

27. For examples of such business successes and opportunities in inner-cities, see: Porter, M.E. and M. Blaxill, "Inner Cities are the Next Retailing Frontier," The Wall Street Journal, November 24, 1997; Blount, E., "Food Fight in Brooklyn," The Wall Street Journal, October 21, 1998; Steinberg, C., "Get Street Smart: Inner Cities Are The Next Hot Growth Area in Franchising," Success, October 1997; Porter, M. E., "New Strategies for Inner-City Development," Economic Development Quarterly, February 1997.; Bird, L., "Shunned No More, New York’s Harlem Entices Big Chains Seeking Fresh Turf," The Wall Street Journal, July 25, 1996; Rebuilding Inner-City Communities: A New Approach to the Nation’s Urban Crisis (New York: Committee for Economic Development, 1995); Abell, B. and J. O’Connor, "Inner-City Supermarkets Provide Economic Opportunity," Nation’s Cities Weekly, May 8, 1995; Rosenberg, R. M., "Banking on the New America," Vital Issues of the Day, March 1, 1995; Henderson, A., "Big Stores Return to the Mean Streets," Governing, October 1994; Barrett, A., "Talk About Doing Well By Doing Good: American Savings’ Mortgages in the Inner City Are a Gold Mine," Business Week, December 6, 1993.

28. See, for example: Schorr, L. B., "A Common Purpose: Putting It All Together to Transform Neighborhoods," in The State of Black America 1998 (New York: National Urban League, 1998); Jeter, J., "Taking a Businesslike Approach To Revitalize Poor Neighborhoods," The Washington Post, October 28, 1997; Cohen, A., "City Boosters," Time, August 18, 1997; Rebuilding Inner-City Communities: A New Approach to the Nation’s Urban Crisis (New York: Committee for Economic Development, 1995); Catell, R. B., "Saving the Inner Cities: A Call to Business," Chief Executive, November 1995; Stodghill, R., "Bringing Hope Back to the Hood," Business Week, August 19, 1996; Barnes, J.E., "Reclaiming Our Cities; Block by Block," The Washington Monthly, April 1996; Alter, J., "What Works," Newsweek, May 29, 1995; Stanfield, R.L., "Block by Block," National Journal, July 8, 1995.

29. Brown, C. M., "The Business Factory," Black Enterprise, October 1998.

30. Hunt, A., "The Inner Cities Are Politically Incorrect," The Wall Street Journal, August 22, 1996.

31. ICIC Web site ( Porter’s articles on inner-city revitalization through private sector approaches (Porter, M. E., "New Strategies for Inner-City Development," Economic Development Quarterly, February 1997; Porter, M. E., "The Competitive Advantage of the Inner City," Harvard Business Review, May-June 1995) have spawned much commentary and discussion. Some critics, for example, pointed out that Porter failed to take into account the fact that the success of private sector approaches to inner-city revitalization depends on (i) the critical role of government in areas such as crime prevention, social welfare, etc. and (ii) changes in the business community’s perceptions of inner-cities and their residents that arise from racial stereotyping. See, for example: the Special Issue of the Review of Black Political Economy: "Responses to Michael Porter’s Model of Inner-City Redevelopment," Fall-Winter 1995; Bates, T., "Response: Michael Porter’s Conservative Urban Agenda Will Not Revitalize America’s Inner Cities; What Will?", Economic Development Quarterly, February 1997; Harrison, B. and A. Glasmeier, "Why Business Alone Won't Redevelop the Inner City: A Friendly Critique of Michael Porter's Approach to Urban Revitalization," Economic Development Quarterly, February 1997; Harrison, B., "Why Business Alone Won’t Fix the Cities," Technology Review, October 1995; Lowery, M., "Revitalizing Inner Cities," Black Enterprise, January 1996.

32. Porter, M. E., "New Strategies for Inner-City Development," Economic Development Quarterly, February 1997.

33. ICIC Web site (


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